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THE SUNDAY TIMES (UK): Focus: Year of the Chinese dragon: The explosive growth of China left its mark on the world. It devoured raw materials, pushing up the price of commodities. And its torrent of exports to America dragged down the value of the dollar.: “Sir Philip Watts began the year as chairman of the world’s 10th-largest company. Then the authorities accused Shell of inflating its oil reserves. Watts took the rap. Today he spends much of his time negotiating with the Financial Services Authority over whether the City regulator unfairly besmirched his name in bringing an action against the company for misleading investors.” ( 26 Dec 04


Peter Koenig reports

December 26, 2004  


On Thursday George Magnus, UBS chief economist, led his wife and children into the bustle of pre-Christmas London, ducking out only long enough for a lunch of pizza.


Later, Magnus watched the bustle in the stock market as Wall Street indexes nudged three-year highs and the FTSE 100 index rallied to close the week at 4,798.1, up 11% from its 2004 low.


But Magnus attached little significance to the stock-market rally. “Possibly, it was sparked by the increase in merger-and- acquisition activity, and that would be good,” he said. “Generally, though, I discount what happens between December 20 and the end of the year.”


Like many analysts reviewing 2004, Magnus focused instead on three themes — the rise of China, the fall of the American dollar and the rocketing price of oil and other commodities.


He also looked east. The Russian state’s ruthless dismantling of Yukos set a sobering tone on 2004. Until two weeks ago it was Russia’s largest oil company; now it is almost bereft of value and Mikhail Khodorkovsky, its controlling shareholder, is languishing in jail. In terms of sheer drama, the rise and fall of Yukos vies to be the business story of the year.


But Yukos also shows how the world has changed over the medium term. During the cold war there was one unquantifiable risk — nuclear obliteration — and thousands of commercial risks that could be analysed and managed. Now that politics and commerce are intertwined, the evaluation of risk has become more complex and difficult.


The two-word summary of 2004 is: risk increased. How much is hard to quantify. “What you can say is it’s up,” said Brendan Brown, the London economist at Bank of Tokyo Mitsubishi.


Twelve months ago pundits forecast that 2004 would be like 2003. The smooth but robust economic rebound that began as America invaded Iraq would continue, they said. The world was heading back to the future. We were returning to the Goldilocks economy in which inflation was tame, commodity prices were under control and growth was not too hot and not too cold.


Going by the numbers alone, the forecasters were right. The world economy is set to grow by 5%, the highest level in 30 years. The British economy is growing by more than 3%, up from 2.2% in 2003. Inflation in Britain is still a manageable 3.4% (under the old RPI measure), while unemployment fell to 5.1% from 5.7% in 2003.


But the numbers have not wiped away memories of the 2000-2 world recession, the worst and most protracted since the second world war. And we are still living with one consequence — an unbalancing of the world economy not seen for 20 years. America has grown addicted to Asian credit. Asia has grown addicted to American shoppers.


“American consumers and Chinese producers accounted for 90% of what was driving the global economy this year,” said Steven Roach, chief economist at Morgan Stanley in New York.


He said the gap between the main deficit and surplus nations stood at almost 3% of global economic output — three times worse than the 1% in the 1980s, the last time there was a big global imbalance.



BRITISH BUSINESS did well in 2004. But the recovery was marked by tales of fallen giants.


In January Lord Black was being pestered by activist shareholders and was swatting them away like flies. By May he was the one who was being swatted. A Sunday Times headline ran: “Hollinger accuses Black of racketeering and demands £700m”. A Delaware court stopped Black from selling the Telegraph newspapers to the Barclay twins, but in July they bought the Telegraph Group anyway, paying Hollinger £730m. Now Black cronies, including Henry Kissinger, are striking him from their Christmas-card lists.


Sir Philip Watts began the year as chairman of the world’s 10th-largest company. Then the authorities accused Shell of inflating its oil reserves. Watts took the rap. Today he spends much of his time negotiating with the Financial Services Authority over whether the City regulator unfairly besmirched his name in bringing an action against the company for misleading investors.


Ageing baby-boomers began 2004 buying and letting properties to fatten retirement incomes in the face of a collapsing pension system. Last month, as house prices fell at their fastest pace in 12 years, the baby-boomers were biting their fingernails over the prospect of a hard rather than soft landing for the property market.


The two biggest British business stories of the year were Marks & Spencer and Manchester United. Stuart Rose successfully fought off Philip Green. The M&S chief executive turned a deaf ear to Green’s offer of 400p a share, even though the company’s largest shareholder, San Diego-based Brandes Investment Partners, publicly called on the board to consider it. On Friday M&S shares closed at 341Çp.


Manchester United’s manager, Sir Alex Ferguson, fell out with shareholder John Magnier over who owned which parts of a racehorse called Rock of Gibraltar. The ensuing feud was settled out of court. But it raised questions about the club’s future and into the breach stepped the Glazer family from Florida, the improbable owners of the Tampa Bay Buccaneers, seeking to become the even more improbable owners of a British icon, even though nobody in Britain wanted them to.


HSBC Holdings cemented its place as Europe’s most profitable company. Chuck Prince, chief executive of the bank’s great American rival, Citigroup, the world’s most profitable company, bowed in Tokyo to apologise for Citi’s failure to manage branches catering to rich Japanese.


BP reported record earnings on the back of its joint venture with Russia’s TNK while working to steer clear of a tax scandal that has ensnared Mikhail Fridman, Lord Browne’s former sworn enemy and now his partner. The Russian is another oligarch who has fallen under the searchlights of the Moscow authorities, which are investigating the tax affairs of Vimpelcom, a mobile-phone company.


British manufacturing scraped along at the bottom of the Group of Seven league table, as China’s low-cost factories surged. Lifting the bonnet on China’s production engine, The Wall Street Journal described the life of a worker who ought to be a candidate for business person of the year. She was Lu Qingmin, one of the country’s 114m migrant labourers who work up to 14 hours a day, seven days a week, for between £6 and £10 a week.


Lu moved from her rural village in the Hubei province in central China to the Pearl River delta 18 months ago at the age of 16, and found a job testing hand-held games, digital clocks and electronic calendars. But she thought she could do better.


Her penmanship and honesty impressed recruiters at a job fair, and she landed a clerical post at a company making mobile-phone parts in Dongguan, a city under construction in the Pearl River delta.


Her new job pays £50 a month, plus room and board, and reduces her workload to 10 hours a day.


How she and hundreds of millions of farmers’ children like her relate to Chinese authorities added up to an even greater mystery in 2004 than the future of Russia’s oil assets.


“At the beginning of the year people thought China might overheat,” said Morgan Stanley’s Roach. “Then the authorities took action and the economy went from a peak of 19.5% annualised growth to 14.8% through November. The big issue now is China’s commitment to reform.”


A MORE familiar mystery in 2004 was the American economy. Preparing for his second term, President George Bush said things were fine and getting finer. But his critics — some of the harshest of them are in European citadels such as the European Central Bank — believe Bush’s policies will lead to a run on the world’s reserve currency.


The American economy expanded at a strong 4% in the third quarter. Forecasters expect similar growth in the current quarter. Since the 1970s, the dollar bulls say, the American economy has withstood the Opec oil embargo, a Latin American debt crisis, the 1987 stock-market crash, the 1997 Asian debt crisis and the 1998 Russian default, as well as the 2000-2 global recession. So why, they ask, shouldn’t it survive the US federal government budget and trade deficits? “The US is slowing down,” said David Wyss, chief economist for Standard & Poor’s, the rating agency. “But there will still be 3.5% growth in 2005. That’s not bad.”


Wyss and other economists bullish on the American economy predict that the dollar, which has fallen about 15% against a trade-weighted basket of currencies in the past three years, will continue to fall. But he is convinced that the economic pain will be felt in Europe more than in America.


Critics of White House economic policies take a different view. They see America’s growth in 2004 as a one-off — a product of the “jobless recovery” in which company profits were buoyed by cost-cutting.


UBS’s Magnus said: “The dollar isn’t going to collapse in the next few weeks. But in a year, it could fall hard and fast.”


He calls for an end to finger-pointing between America, Europe and Asia and urges co-operation to rebalance the world economy. But he doubts this will happen.


Meanwhile, Wall Street — and the City of London as its European outpost — had a very good 2004. Share prices did not go up as much as some predicted. But bond prices did not fall as much, either. European financial heavyweights, including Deutsche Bank and Credit Suisse, continued to restructure. This month ABN Amro, the largest Dutch bank, said it planned to cut 2,850 jobs, about 3% of its workforce.


But firms such as Goldman Sachs, Citigroup and HSBC are due to report record profits for the year. Revenue in global banking is down from its March 2000 peak, but earnings are up. For investment banks, the year draws to a close not only with a boom in mergers and acquisitions but also in sales of shares.


“Where’s the surprise?” said Trevor Greetham, Merrill Lynch’s director of asset allocation in London. “Average nominal interest rates of central banks in America, Europe and Japan were 1% this year. That's the lowest in 100 years.”


It’s this easy money, combined with the Shanghai building boom and capacity constraints resulting from years of underinvestment in sectors such as oil, that led to the year’s commodity-price boom. It has cooled since October. But it extended from oil, gold, aluminium and copper into sectors that are often overlooked. “People in Britain talk incessantly about house prices,” said Merrill’s Greetham. “But year-on-year, the rise in American house prices was even more impressive. They were up 13%, the fastest in 30 years.”



THE number of the year was the oil price. After touching a low of $10 a barrel in 1998, crude prices began 2004 at little more than $30 a barrel, and rose to a record of $55.67 in New York on October 25, before falling back to about $44.


The rise made an unlikely hero of Bill Gammell, the former Scotland rugby international who laboured in obscurity for a decade as the head of Cairn Energy. In the summer, betting against the oil giants on India, he struck a geyser in the deserts of Rajasthan and the value of Cairn quintupled from about £3 a share to £15. In September Cairn entered the FTSE 100 as the biggest independent oil producer in Europe.


This month Gammell rode the commodity-price roller coaster down after Cairn announced it had struck dry wells in Rajasthan and promptly lost 20% of its value as investors baled out.


The hero of the commodity boom who has yet to falter is Lakshmi Mittal. For decades steel had been viewed as much as an embarrassment as a business. Then in October the Indian-born London resident announced that Mittal Steel was paying $4.5 billion (£2.3 billion) to buy International Steel Group, a cluster of five once-bankrupt companies, to create a giant business. Combining Soviet-era rustbelt companies in places such as Katowice, Poland, with distressed mills from Trinidad to Kazakhstan, Mittal created the world’s No1 steelmaker just as Chinese demand for steel exploded.


With a net worth estimated at £12 billion, he is Britain’s richest resident. He spent a reported £30m to hire Kylie Minogue and other accoutrements for his daughter’s wedding. The question is whether Mittal’s steel business can survive a cyclical downturn. Similar questions will hang over many businessmen in 2005. Will good times continue to roll or will the roof cave in? The odds are that the good times will roll on. But the growing mysteries in which the world of money is enshrouded are likely to make the risks even greater.

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